McGee is under pressure from investors such as billionaire
John Paulson to boost the stock, which trades for less than 40
percent of book value. McGee has said he’s “laser focused” on
reducing risk and that options include lump-sum payments to
clients who agree to exit variable annuities guaranteeing
minimum returns. The firm already scaled back annuity sales and
agreed in April to divest the unit that originates the products.

“Giving out a lump sum right now, it’s costly, but it may
actually be cheaper than keeping the liability on the books,”
said Moshe Milevsky, a finance professor at York University in
Toronto who studies annuities. “It was the rates that were
included in the products that were problematic.”

Life insurers are paying the price for guarantees made to
clients before 2008, when stock markets were in the midst of a
five-year rally and the yield on the 10-year Treasury was more
than 4 percent. The industry took on what billionaire Warren
Buffett has called an “ungodly” amount of risk and accumulated
liabilities as Treasury yields dropped below 2 percent, making
it harder to generate returns to cover the obligations.

The deal to sell the origination unit to Forethought
Financial Group Inc. excludes the contracts previously issued by
Hartford, and McGee’s firm had a $3 billion variable annuity
reserve at the end of the second quarter. The U.S. annuity
business was unprofitable in two of the past four quarters, with
a combined loss of $27 million in the 12 months ended June 30.

‘Aggressively Looking’

The insurer is studying whether it can reach agreements
with other firms to take on liabilities and assets not covered
in the Forethought deal, McGee said Aug. 2. Hartford, based in
the Connecticut city of the same name, is weighing client
payouts even as consumers may opt to stick with their contracts,
McGee said, without disclosing the size of potential incentives.

“We are aggressively looking at that,” he said in
response to a question about lump-sum payments from Christopher
Giovanni, an analyst at Goldman Sachs Group Inc. “That is one
of many work streams that we’re considering with great urgency
and diligence, because we’re determined to reduce the book as
quickly as we can.”

Axa Equitable, a unit of France’s largest insurer, plans to
offer a payment to clients who cancel their standalone
guaranteed death benefit rider on Accumulator contracts issued
between 2002 and 2007, said Jo Ann Tizzano, a spokeswoman for
the company. Those who accept the offer will receive an increase
in their annuity account balance, she said.

Axa Equitable was the No. 1 seller of U.S. variable
annuities in 2007, with $16.3 billion, according to data from
trade group Limra. The figure fell to $7.1 billion last year.

MetLife, Prudential

Industrywide variable annuity sales were $159 billion last
year. The figure had spiked to $184 billion in 2007 as insurers
competed to win more business, in some cases guaranteeing annual
returns of about 7 percent to long-term savers who were willing
to accept limits on access to their funds, said Alan Devlin, an
analyst at Atlantic Equities LLP.

Hartford was among the most vulnerable insurers on the
guarantees because the company didn’t hedge risks as much as
MetLife Inc. and Prudential Financial Inc., the largest U.S.
life insurers, Devlin said by phone from London.

Liabilities on the contracts swelled in the financial
crisis, helping drive Hartford to a U.S. bailout and fueling a
60 percent plunge in the Standard and Poor’s 500 Life & Health
Insurance Index in the 12 months ended May 3, 2009. It was that
day that Buffett, at a press conference in Omaha, Nebraska, said
the industry took on an “ungodly amount” of risk.

‘That’s Poison’

When insurers “tell the policyholder that he gets some of
the up side and you take all the down side, that’s poison,”
Buffett said. “That would be like a stockbroker telling you
that he’ll pay you back if your stocks lose money.”

About 26,000 contract holders will get the Axa Equitable
offer, scheduled to be mailed starting in October, Tizzano said.

“We are making this offer because high market volatility,
declines in the equity markets, and the low interest-rate
environment make continuing to provide these guaranteed benefits
costly,” Axa Equitable said in a June 8 regulatory filing.

Transamerica, a unit of The Hague-based Aegon, is offering
a lump-sum option that was initiated in May, Cindy Nodorft, a
spokeswoman for the company, said in an e-mail. The offering
applies to eligible owners of Transamerica variable annuity
policies with riders such as a guaranteed minimum income
benefit, according to a company document.

Crystalizing Losses

While buying out customers may limit companies’ gains from
stock-market rebounds, insurers can still benefit from
terminating their obligations, Atlantic Equities’s Devlin said.

With lump-sum payments, “you crystallize some of the loss,
but not all of it, and it frees up capital,” Devlin said.
Insurers “obviously design it in order to make sense for
them.”

Consumers will have to weigh contract terms, their health
and other assets when deciding whether to take a lump sum, said
Glenn Daily, a fee-only insurance consultant based in New York.

“The sales pitches make this look simple, but when you
actually have to make a decision, that’s when you see how
difficult it is to offer advice on it,” he said. “It’s a
legitimate reason in my view to stay away from these products.”

MetLife and Prudential, which became the largest variable
annuity providers, have lowered some guarantees and changed
policy terms to limit risk. MetLife CEO Steven Kandarian is
focusing on emerging-market growth and sales of accident-and-health protection in the U.S. while scaling back from variable
annuities.

Addressing Risk

“The riskier your overall portfolio is perceived or is,
either one, whether it is or perceived, it still goes through to
your stock price,” Kandarian said in a May 23 presentation. “The
goal is to shift toward a more predictable earnings stream.”

McGee, who became CEO in 2009 and repaid a $3.4 billion
U.S. bailout the next year, is seeking to focus on property-and-casualty coverage to boost the company’s share price. Travelers
Cos., the P&C company that is the only insurer in the Dow Jones
Industrial Average, trades at almost 100 percent of book value,
a measure of assets minus liabilities.

Hartford struck deals this year to sell its individual
annuities distribution business to Forethought and the Woodbury
Financial Services broker dealer to American International Group
Inc. McGee, 57, promoted Beth Bombara in July to president of
the life runoff operation to shrink the annuity obligations.

“Hartford is diligently exploring opportunities to reduce
the size and risk of our annuity exposures, isolating or
separating them from the ongoing businesses and, over time,
freeing up associated capital,” Shannon Lapierre, a company
spokeswoman, wrote in an e-mail. “It’s early in the process to
comment on specific plans, but we are evaluating both
operational and transactional opportunities.”